Health Policy 98 (2010) 3–14 Contents lists available at ScienceDirect Health Policy journal homepage: www.elsevier.com/locate/healthpol Risk equalisation and voluntary health insurance markets: The case of Australia Luke B. Connelly a,∗ , Francesco Paolucci b , James R.G. Butler b , Paul Collins c a Australian Centre for Economic Research on Health, Centre for National Research on Disability and Rehabilitation Medicine (CONROD), and School of Economics, The University of Queensland, Australia b Australian Centre for Economic Research on Health, The Australian National University, Australia c Private Health Insurance Administration Council, Australia article info Keywords: Risk equalisation Claims equalisation Subsidies and taxes Risk selection Private health insurance Community rating abstract In April 2007, Australia introduced a risk equalisation (RE) scheme (de facto a claims equal- isation scheme), which replaced an extant reinsurance scheme that had operated since 1976. This scheme is one of a number of policy measures that the Australian Government has instituted to support the voluntary private health insurance (PHI) market which is sub- ject to mandatory community rating and the attendant problem of selection. The latter has been a persistent concern in the Australian PHI market since the introduction of Australia’s universal, compulsory national health insurance scheme Medicare. This paper presents a brief overview of Australia’s health care financing arrangements and, in particular, focuses on the history, structure and functioning of the RE scheme. It provides an exposition of the operation of the scheme and empirical evidence of the scheme’s effects in its first full year of operation, 2007–08. The paper makes three contributions: first, it provides the only detailed overview of the functioning of the Australian RE scheme published to date; sec- ond, it presents the first empirical measures of the scheme’s operation at the level of the 38 individual PHI funds; and third, it describes the systematic differences in the scheme’s operation with respect to large and small funds. Thus, this paper provides a number of insights into the operation and outcomes of the Australian RE scheme following its first year of operation. Crown Copyright © 2010 Published by Elsevier Ireland Ltd. All rights reserved. 1. Introduction This article focuses on the current RE scheme and is organised as follows. First, an overview of the role and regu- lation of PHI in Australia is provided (Section 2). Then, after presenting the main characteristics of the RE scheme (Sec- tion 3), the outcomes of the scheme at the fund and industry level are analysed (Section 4). Section 5 concludes. ∗ Corresponding author at: ACERH, The University of Queensland, Mayne Medical School Building, Herston Road, Herston QLD 4006, Aus- tralia. Tel.: +61 7 3346 4838; fax: +61 7 3346 4603. E-mail address: l.connelly@uq.edu.au (L.B. Connelly). 2. Private health insurance in Australia’s health care system 2.1. Health care financing in Australia The Australian health care system relies upon a mix of public and private financing and provision. Since 1984 all Australian residents have been covered by a universal, compulsory, tax-funded national health insurance scheme called Medicare. 1 Medicare provides public hospital treat- ment free of charge to public patients. Specifically, any 1 Before the introduction of Medicare, a short-lived universal public insurance was introduced in 1975 (Medibank), then removed in 1976. 0168-8510/$ – see front matter. Crown Copyright © 2010 Published by Elsevier Ireland Ltd. All rights reserved. doi:10.1016/j.healthpol.2010.06.002